Why Wall Street isn’t tanking: The bad-news stock market rally
Greece looks close to bolting from the European Union with national elections this weekend. Spain’s banks were just bailed out, and Italy might be next. And, closer to home, Wall Street is still reeling about May’s crummy jobs report.
So you’d think U.S. stocks would be tanking?
Nope. Welcome to the bad-news rally: The Dow Jones industrial average shot up more than 160 points on Tuesday.
Right now, some traders out there are betting that economic and political signals continue to worsen, leading to another financial crisis. And that this will force the Federal Reserve to revive stimulus spending.
The Fed in 2008 cut interest rates to near zero and embarked on a $2.3 trillion plan to buy long-term securities. Both were designed to spur growth and revive the economy after the financial crisis. Some on Wall Street are clamoring for more.
One of the Fed’s most dovish voices seemed to back this up on Tuesday. Charles Evans, president of the Chicago Federal Reserve Bank, said the central bank needs to bulletproof the economy. “Failure to act aggressively now will lower the capacity of the economy for many years to come,” Evans said in a speech.
But here’s the rub: Evans isn’t a voting member of the Fed’s policy-setting committee. And Federal Reserve Chairman Ben Bernanke has given no indication that another round of stimulus is on the way when that committee meets next week.
Stocks rallied 300 points ahead of Bernanke’s testimony before Congress last week, hoping he’d tease some new program to help pump up the economy. He gave no such indication. And the markets fell back.
Analysts say these gyrations are not the sign of a healthy stock market. For evidence of that, look no further than U.S. Treasury bonds. Yields have recently hit record lows as investors fear Europe’s financial crisis is at the boiling point.
Patience through the next week or so might pay off for those who want to wade back into the market, one analyst said.
“With plenty of negative catalysts to dominate the market’s attention in the coming weeks, we expect further weakness in U.S. stocks over the near term,” said Nicholas Colas, ConvergEx Group’s chief market strategist. “At some point this will be an opportunity.”
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